All Forum Posts by: Jeff Glass

If you don't want to reinvest in real estate after selling, or if you want to be able to take your time looking for replacement property, then you may consider using a Monetized Installment Sale. With this approach, you defer capital gains tax for 30 years and receive 93.5% of the net sales proceeds in cash, which you can hold or reinvest as you please.

You might also look into a Monetized Installment Sale to rescue a failing exchange. This approach defers all capital gains taxes for 30 years and delivers 93.5% of the net sales proceeds in cash (less payoff of any financing on the relinquished property).

We will go below $1 million on a monetized installment if the numbers make sense for the client and for us. There needs to be a significant benefit for the client, which can be the case if the capital gains tax to be deferred is a high percentage of the sale price.

You don't have to change your offer. Instead, suggest that he look into doing a monetized installment sale. This way, he can defer his capital gains tax for 30 years, and he can walk away with 93.5% of the net sales proceeds in cash. He can then invest that money any way he chooses, without 1031 hassles, deadlines and risks. The monetized installment sale is usually a good strategy when someone has a big capital gain and they don't want to exchange (or even reinvest in real estate). In other words, a cash exit without paying capital gains tax (for 30 years).

I can explain this in more detail if you are interested in learning more.

Has the seller owned the property for more than a year? If so, the gain is considered long-term. If this is the case, the seller might want to consider a monetized installment sale. 

You, the buyer, would need to come up with your own financing, or pay cash, but the advantage for the seller is that they could defer their capital gains tax for 30 years, and they could walk away with about 93.5% of the net sales proceeds in cash. 

If the seller is made aware of this option, they might be more willing to sell, because they will obtain much more cash from the transaction than if they do a regular sale or a regular installment sale.

Normally a cost segregation study will have its scope limited to items that are affixed, such as carpeting, window coverings, cabinetry, etc. Fpllowing IRS guidance, these studies should be performed by a qualified firm, which normally is not an accounting firm unless they have hired some engineers and have incorporated this specialty into their practice. (Unusual, except for larger CPA firms.)

A cost segregation company may include certain items that are not affixed within the study, but you should discuss that in advance to see if they will in fact do that. The techniques used to produce cost segregation studies are based on construction cost engineering and estimation, and they may or may not have expertise in assigning costs to some of the assets you have in mind. In my past experience with apartment and hotel properties, cost segregation studies sometimes included items such as kitchen appliances. But that was about as far as it went.

All of that applies to assets already in place. If you are buying new furnishings, the easiest way to handle deductions for them (whether as expenses or depreciable assets) is just to keep your receipts. If they are truly "furnishings" that have a long enough economic life that they do not qualify for expensing then you may have to depreciate them. Usually furnishings have a short life for depreciation purposes (5-7 years). 

However, if you talk with your accountant, they may advise you that some of those items could qualify for bonus depreciation, which would enable you to deduct their costs in the tax year you acquired them. I agree with John, above, when he says your accountant could probably handle that. You only need a cost segregation company when it comes to the building, land improvements, and items affixed thereto.

It is quite true that someone considering a tax strategy with which they are not already familiar should not rely on the opinion of someone who has a financial interest in the transaction. Every person considering a monetized installment sale should obtain tax and legal review from an objective, professional, third-party adviser. Preferably, the adviser has previously reviewed this strategy so that it is not necessary for them to charge for time taken to research this topic.

Monetized installment sales may be considered controversial by some. Where controversy arises is usually in cases where there is not a correct or complete understanding of either the strategy or the applicable laws and legal doctrines governing its use. However, this strategy has been used successfully (without IRS challenge) by numerous property owners for nearly 20 years, including many public companies that have reported their transactions to the SEC, with the full acquiescence of their boards and outside auditors. Also, there is an IRS memorandum which explains in great detail why a transaction of this type was considered acceptable when the applicable laws and legal doctrines were applied to it.

There is a potential solution. It's called a Monetized Installment Sale. 

With this option, you sell the property through a dealer (somewhat like a 1031 intermediary) on a 30 year installment note, interest only. The dealer sells the property to the end buyer you've lined up. The dealer pays you interest only payments for 30 years, with the principal paid back at the end of 30 years in a balloon payment.

Meanwhile, you obtain a loan from a private lender that the dealer will introduce you to. The loan is for 95% of the net sales proceeds of the property you've just sold. You can use the loan proceeds for any business purpose, including buying another real estate investment if you wish. The loan proceeds are not taxable. It is this loan that provides you liquidity, and you can use these funds to buy another piece of real estate.

The interest-only payments on the loan are funded by the payments you receive from the dealer on the installment sale contract. All payments on the two loans net out to zero. So the net result is this: you get 95% of the net sales proceeds from the sale, and you defer your capital gains tax for 30 years.

This has been OK'ed by the IRS (in 2012).

In your situation, in which you want to use the sales proceeds to buy another primary residence, there's a little more to this in order to structure it correctly. Send me a private message if you want to discuss that.

Correct. Depreciation is an accounting concept only and is based on historical cost, not market value.

As a former cost segregation professional I agree that the ability to get the bonus depreciation write-off in year one of ownership is huge in terms of it's potential ROI benefit.

One subtle point to remember is that cost segregation is only applicable to new depreciable basis, so if a property is acquired through a 1031 tax deferred exchange, the investor will not be able to apply cost segregation to the carryover basis from the relinquished property. Instead, cost segregation will be limited to the excess basis. The depreciation system of the carryover basis must be continued on the depreciation schedule for the replacement property.